Proposals to Reform Money Market Funds

Three proposals to reform money market funds were the subject of a letter from the presidents of 12 Federal Reserve banks to the Financial Stability Oversight Council.

The first proposal would allow net asset value (NAV) to float. Currently, money market funds are priced at $1 dollar per share. This price is held steady, even though the value of the underlying assets fluctuates on a daily basis (the amount of change is usually very small). The advantage of a floating NAV is that all purchases into and withdrawals from a fund by shareholders are conducted at prices that match the current valuation. In the event of a crisis, this would prevent a money market fund from being forced to buy back shares worth less than $1 at $1 per share—a situation that gives a potential advantage to those who sell their shares first. The downside is that under normal circumstances, any shareholder could find themselves receiving less than $1 per share when they need to withdraw cash.

A second proposal would create a 3% NAV buffer. This buffer would allow the fund to absorb small fluctuations in its net asset value, while maintaining the $1 per share value. However, the Federal Reserve Bank presidents noted that this proposal could lead to reduced yields and provide a benefit to first movers who foresee a breaking of the buffer and move to sell their shares first. (Under such scenarios, remaining shareholders face the threat of absorbing the fund’s losses.)

A third option would be to combine the NAV buffer with a minimum balance at risk (MBR). Under this proposal, when a full withdrawal is requested, a portion of the funds would be held back for 30 days. The Federal Reserve Bank presidents note that this may not prevent a run on money market funds from occurring, either.

It is important to note that these are just comments on proposals. It continues to remain uncertain what, if any, new reforms on money market funds will be implemented, especially since the fund industry has pushed back against the proposed changes.

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